The latest thinking from PwC on the issues that matter to government and the public sector.

The Spending Review and its economic impact

26 June 2013

By John Hawksworth, Chief Economist

The overall amount to be spent by the government in 2015/16 is £745 billion, exactly as planned in the Budget. So the size of the cake is the same as previously planned and the net effect of today's announcements on overall UK economic growth in 2015-16 is therefore likely to be minimal relative to what we already knew. The real cut of 2.7% in total departmental resource spending in 2015/16 was also very close to the 2.8% real cut we had estimated was likely before the Chancellor's speech.

"There was a welcome rise in transport capital spending, but total public sector gross investment is projected to be exactly the same in 2015-16 as in 2014-15 in cash terms (£50.4 billion). This implies a real cut of 1.7% in gross investment in that year based on OBR inflation forecasts. So there is no capital spending bonanza planned for 2015-16, just much slower real cuts than we saw for the past two years. However, the plans to announce longer term infrastructure plans beyond the Spending Review period is sensible and welcome.

"The proposed cap on parts of welfare spending from 2015, excluding state pensions and some cyclical items, could prove in the long run to be one of the most significant announcements today. It will give future Chancellors an extra lever to pull to control a large element in public spending. But we will need to wait and see how this works out in practice.

"The Chancellor was correct to highlight the strong growth in private sector employment over the past three years. We expect this to continue, with around 1.7 million new private sector jobs by 2017/18 more than offsetting around 900,000 public sector job cuts over the same period. But we expect that this will also be associated with continued subdued earnings growth with the level of real earnings in 2017 still being around 5% below its peak level in 2008.